Category: Insurance Journal

Estate doesn’t own deceased’s Maple Leaf tickets, and is instead a constructive trustee

At issue       

Sometimes estate assets have commercial value, other times emotional attachment, and frequently both. That last situation is ripe ground for estate disputes.

I have a friend who was a shareholder in a business corporation which owned Toronto Maple Leaf season tickets used to entertain clients. When the team moved from the Gardens to its new home at Air Canada Centre, the new tickets (and this may have been true of the old ones) were required to be held in his personal name, not in the name of the corporation as they had been at the time. When the corporation was wound down a few years later, one of the shareholders bought out the tickets, and they all shook hands and called it a day.

Their amicable resolution contrasts sharply with a recent case where an estate’s claim to Leaf tickets was opposed by the deceased’s business colleagues. But first, here are a few cases as warmups to the main event.

Fobasco Ltd. v. Cogan, 72 O.R. (2d) 254 [1990]

When major league baseball arrived in Toronto in 1976, Cogan subscribed for eight Blue Jays season tickets. Six of the eight tickets were subsequently offered to and paid for by the plaintiffs. Cogan advised in 1986 that he would soon cease making the tickets available to the plaintiffs, and though the dispute was settled for a time, he stopped sharing the tickets in 1989 when the Jays moved into the Skydome.

The plaintiffs failed in all their arguments under contract, resulting or constructive trust, and fiduciary duty. Importantly on the trust arguments, the judge found that Cogan initiated the purchase for his own benefit vis-à-vis the Blue Jays, then extended an offer to the plaintiffs.

Byers v. Foley, 16 O.R. (3d) 641 [1993]

The parties were members of a men’s softball team that decided to purchase Toronto Blue Jays season tickets beginning in 1983. Two of the teammates were designated to make the arrangements, and their names were recorded in the official records. In 1989 those two advised the others that they were no longer going to share the tickets.

The plaintiffs commenced an action based on constructive trust. As both the certainty of subject-matter (the tickets) and objects (the parties) were ascertained, the only issue was whether the third certainty of intention to create a trust had been met. In distinction to Fobasco v. Cogan, the purchasers acted on behalf of the group from the beginning, leading the judge to hold that the purchasers held the tickets as trustees throughout.

Trustee of estate of A.M.K. Investments Limited v. Kraus, (1996) 42 CBR (3d) 227

Kraus was listed as the licence holder for Toronto Raptors season tickets. His corporation, AMK, paid for and used the actual tickets. After AMK was petitioned into bankruptcy by its creditors, Kraus contended that he continued to own the ongoing licence.

The judge acknowledged the distinction between the licence and ticket purchase, but found on the facts that AMK funded the cost of both. Kraus was held to be trustee under a purchase money resulting trust in both respects, and was ordered to transfer the licence to AMK.

Anspor et al v. Neuberger, 2016 ONSC 75

Chaim Neuberger and Harry Sporer emigrated from Poland to Canada, launching a successful construction business in partnership as Nuspor. In the late 1960s or early 1970s, a business contact brokered a deal for the two to purchase Toronto Maple Leaf season tickets from its then-owner Harold Ballard. They were advised (incorrectly, though nothing turns on the point) that the tickets could not be held by Nuspor, so they decided to register in Neuberger’s name alone.

After Neuberger’s death in 2012, his daughter as executor took the position that the tickets were his personally, and in turn belonged to the estate. The plaintiffs argued that Nuspor was always the beneficial owner, with Neuberger (and later the estate) serving as trustee.

As in Byers, the facts and surrounding conduct showed that the tickets were being acquired for Nuspor, not Neuberger personally. Furthermore, and akin to AMK v. Kraus, Nuspor paid all amounts, thus satisfying the requirements of a purchase money resulting trust. The executor was ordered to transfer the tickets to Nuspor.

Practice points

  1. Though these cases all involve Toronto franchises, a quick search of news and legal databases reveals that the issue crosses many borders – both geographic, and between here and the hereafter.
  2. Inherent in the estate cases is that a person cannot pass on a better title than was held during life. Indeed, the estate will be bound by any restrictions imposed upon the living person, and will likely be required to extricate itself from any continuing involvement.
  3. Whatever the commercial requirements of any sports club, it would be a good idea for any pooled ownership arrangements to be backed-up by clear documentation acknowledged by all purported owners and trustees.

RRIF rollover allowed via joint election between deceased’s estate and grandson

At issue

On death, a person’s property is deemed disposed, including funds held in registered retirement savings plans and registered retirement income funds. The RRSP or RRIF value is brought into income in the deceased’s terminal year. In addition to triggering taxation sooner than the family may wish, this can contribute to a higher tax bill than anticipated due to the lump sum being taxed in a single year.

Relief is available by certain tax-free rollovers to qualified beneficiaries: a spouse, a dependent minor child, or a disabled dependent minor or adult child. Commonly this can be achieved through direct beneficiary designation on the plan, or alternatively if the funds have fallen into the estate then by joint election between the deceased’s personal representative (executor) and a qualified beneficiary who has a sufficient entitlement as an estate beneficiary. The procedure for spouse beneficiaries is typically straightforward, but could be more complicated with a minor or mentally infirm individual.

Putting the focus on minors, even if there is a remaining surviving parent, that parent is generally the automatic guardian of the child’s person but not of property. Approval of the provincial public trustee or other court order will be necessary to make the election and execute a legal contract for the required annuity to age 18 – and having those funds in such a young person’s hands without oversight is likely not a desirable result. These hurdles were addressed in a unique fact situation in a recent advance income tax ruling from the Canada Revenue Agency (CRA).

Income Tax Act (ITA) Canada

Paragraph 56(1)(t) and parts of section146.3 – These provisions work together to allow the value of a RRIF to be a designated benefit (income inclusion) of a beneficiary rather than the deceased/estate.

Section 60.011 – A lifetime benefit trust may be established for a minor child or grandchild who was dependent on a deceased by reason of mental infirmity. A qualifying trust annuity may be purchased with the trust funds.

Paragraph 56(1)(d.2) and section 75.2 – These provisions cause income paid to a qualifying trust annuity to be included in the income of the trust beneficiary.

CRA 2016-0627341R3 (E) – Rollover of RRIF proceeds after death

The exact date of this advance income tax ruling is redacted, but it was issued some time in 2016.

The minor child was adopted by his grandmother because his parents were incapable of caring for him. A court issued a parenting order providing that the grandmother had “all powers, responsibilities, entitlements of guardianship and decision-making regarding the grandson.” Furthermore, it was clear that he was financially dependent on her and no-one else.

Unfortunately a difficult situation got worse when it was determined that the grandmother had a terminal medical condition. As part of arranging her affairs, she named her son as executor under her will, and executed an authorization for that son and his wife to apply to adopt the grandson (presumably their nephew). Two RRIFs came into the grandmother’s estate upon her death, the combined value of which was less than the grandson’s share of the estate.

The proposal to CRA goes into a number of steps, including reference to the above ITA sections, essentially having the RRIF go by tax-free rollover to an annuity that will pay out over the years until the grandson reaches 18. The payments will be received by the trust, but will be taxable to the grandson whose basic personal tax credit will negate much or all of any tax.

In approving the proposal, the CRA acknowledges the dual-purpose to reduce taxes otherwise arising on the grandmother’s death and to allow the executor to maintain control over the funds. Though not stated in the ruling, take note that the minor child must have had a mental infirmity in order for ITA s.60.011 to have applied. This also skirts the issue of having the minor enter into the contract for the annuity, as it is the executor/trustee of the lifetime benefit trust who carries out that purchase.

Practice points

  1. Directly naming minors or mentally infirm individuals as RRSP/RRIF beneficiaries may enable tax deferral, but it does not resolve all complications and hurdles.
  2. Though there is only brief mention of the grandmother’s parenting court order and the presumed/forthcoming adoption order in the ruling, those seem to have facilitated the process. Together with the child’s apparent mental infirmity, an acceptable result is obtained.
  3. More generally, all parents and guardians of minors should be conscious of the need to coordinate beneficiary designations with will provisions to satisfy their estate planning needs.

Per CRA, no fee deductibility for advice on entering into or redeeming segregated funds

At issue

Segregated funds are sometimes described as the insurance industry’s version of mutual funds. This is convenient as a rough reference point, as outwardly their value tracks against an underlying pool of investment assets segregated from the insurer’s other assets.

In truth, however, they are a form of annuity, a type of insurance contract. This is not mere technical phrasing; a host of rights, obligations, protections and restrictions flow from this characterization. Of particular interest are guarantees of future account value or income flow, though the insurer will charge a fee inside the contract for this.

But how are fees charged outside the segregated fund by a financial advisor treated for tax purposes? Specifically, does advice related to segregated funds mirror the tax-deductibility accorded to advice on buying and selling mutual funds?

Income Tax Act (ITA) Canada paragraph 20(1)(bb) – Fees paid to investment counsel

As a general tax principle, an amount may (note the emphasis) be deductible in computing income where that outlay is related to the generation of income. Enumerated under ITA s. 20(1) are deductions permitted in computing income from business or property, with investments falling within the latter category.

Pursuant to ITA 20(1)(bb)(ii)(A), a deduction may be taken for “advice as to the advisability of purchasing or selling a specific share or security of the taxpayer” where fees are paid to a person whose principal business is advising in that respect. Mutual funds pool investors’ capital to invest in shares or securities, and thus qualify under this section.

2014 CALU Conference, Question 5 – Segregated Fund Counselling Fees – May 6, 2014

At the 2014 Conference of Advanced Life Underwriters (CALU) roundtable, representatives of the Canada Revenue Agency (CRA) considered whether a deduction should be allowed for advice related to the purchase or sale of segregated funds. The key part of the response is as follows:

“Paragraph 20(1)(bb) of the Act applies in the context of shares or securities of a taxpayer. A segregated fund policy is a contract of insurance and, in our view, is not a share or security of the taxpayer. Consequently, it is our position that paragraph 20(1)(bb) of the Act does not apply to fees paid by a taxpayer in respect of the advisability of the acquisition or disposition of segregated fund policies, or for the administration or management thereof as the requirements of that paragraph are not met.” [Emphasis added here.]

In the conference report, the CALU editors indicated that Department of Finance officials had expressed some sympathy to a broader interpretation, and that industry stakeholders would continue to correspond with CRA in the hopes of the agency taking a more expansive view of segregated funds.

2014-0542581E5 (E) – Segregated fund counselling fees – August 24, 2016

In an email dated August 6, 2014 (sent 3 months after the CALU conference above), the CRA was asked to reconsider its position that a segregated fund policy is not a security. In its response, CRA redacts the addressee’s name, though it appears to be directed to CALU.

After acknowledging that there are arguments for and against the proposition based on the plain text of the terms, the analysis turns to the context in which the words are used. Specifically, paragraph 20(1)(bb) is an exception to the general limitation on deductibility delineated in paragraph 18(1). The position put forward is that as the exception is narrowly drafted, its interpretation should be similarly narrow.

The author then harkens back to predecessor provisions of the ITA and the definition of the term “security”, both pre-dating the existence of segregated funds. From that perspective, an expansion of that definition could have unintended consequences elsewhere in the ITA.

In the author’s opinion, the inclusion of segregated fund in the definition of security is not supported by the law, so a legislative amendment would be necessary to achieve this result. The letter then acknowledges that the issue has already been brought to the attention of the Department of Finance, presumably by the letter recipient.

Practice points

  1. CRA does not consider counselling fees deductible when paid to an advisor who advises on entering into or redeeming segregated funds.
  2. For clarity, the subject matter of this discussion is the charging of fees directly by an advisor to an investor/client. Any fees charged within a segregated fund cannot be claimed as a deduction by an investor.
  3. Note as well that segregated funds have both insurance and investment elements that may make them well suited to a particular individual, with deductibility being a secondary consideration or non-issue.
  4. Depending on the reception at the Department of Finance, this may not be the end of this issue, though it is ultimately up to legislators whether to make changes to the law.